T .C. Su m m ary Op i n io n 2 02 0 -2 0

UNITED STATES TAX COURT
MARK PILYAVSKY, Pet i t i o n er v . COM M ISSIONER OF INTERNAL REVENUE, Res po n d en t

Do ck etNo . 1 8 2 57 -1 8 S. Fi l edJ u l y 2 , 2 0 2 0.

M arkPi l y av sky , p ro s e. Dan i el C. Ch av ez an dM i ch ael K. Park , fo r res p o n d en t .

SUM M ARY OPINION GERBER, J u d g e: Th i s cas e was h eard p u rs u an tt o the p ro v i s i o n s o f s ect i o n 7 4 6 3 o f t h e In t ern al Rev en u e Co d e i n effect wh en th e p et i t i o n was fi l ed
. 1

1 Un l es s o t h erwi s e i nd i cat ed , al l s ect i o n referen ces are t o th e In t ern al Rev en u e Co de i n effect fo r t h e rel ev an tt im es , an d al l Ru l e referen ces are t o th e (co n ti n u ed ...)- 2
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Pu rs u an t t o s ect i o n 7 4 6 3(b ), th e d eci s i o n t o b e en t ered i s n o trev i ewab le b y an y
o t h er co u rt , an dth i s o p i ni o n s h al l n o t b e t reat ed as p reced en tfo r an y o th er cas e. Res po n d en td et erm i n eda $ 7 ,8 12 i n co m e t ax d efi ci en cy an da $ 1 ,5 6 2 .4 0 accu racy p en al t y u n d er s ect i o n 6 6 6 2 (a) fo r p et i t io n er’ s 2 0 1 5 t ax ab l e y ear. 2 Th e i n co m e t ax d efi ci en cy

i s at t ri b u t ab l e t o t h e d i s al l o wan ce, fo r l acko f s ubs t an ti at io n , o f d educt i o n s fo r v ari ou s Sch edu le C ex p en s es , i n cl u di n g m eal s an den t ert ai n m en t , car an dtru ck , an dtrav el , al l o f wh i ch are s ub jectt o th e s t ri cts ub st an t i at i o n req u i rem en t s o f s ect i o n 2 7 4 (d ). Th e s o l e qu es t i o n we co n s i der i s wh et h er p et i t i o n er h as s ub s tan t i at ed an ds h o wn thath e i s en t i t l ed t o d edu ctan y o f th e d i s al lo wedex p en s es . Back gro u n d Pet i t i o ner res i dedi n Cal ifo rn i a wh en h i s p et i t io n was t i m el y fi l ed . Du ri n g 2 0 1 5 p et i t i o n er was em

p l o y edb y Paci fi c In v es t m en t M an ag em en tCo . (PIM CO)
as a s en i o r d at ab as e en g i n eer. Fo r 2 0 1 5 h e rep o rt ed$ 17 6 , 2 1 1 o f s al ary fro m PIM CO. Pet i ti o n er, o n a Sch edu l e C, Pro fi to r Lo s s Fro m Bu s i n es s, rep o rt eds el fem pl o y m en tact i v it y

fro m co ns u l t i n g . He rep o rt ed$ 1 0 , 0 0 0 o f i n co m e an dcl ai m ed

1 (...co n t in u ed ) Tax Co u rtRu l es o f Pract i ce an dPro cedu re.

2 Attri al res p on d en t co n ced edth e s ec. 6 6 62 (a) p en al t y .- 3
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$ 5 0 ,3 9 4 o f d edu ct i o n s fo r a l o s s o f $ 4 0 , 3 9 4 wh i ch h e u sedt o redu ce t h e rep o rt ed i n co m e, i n cl u d i n g h i s PIM CO s al ary . Th e $ 5 0 ,3 9 4 o f d edu ct i o n s co m p ri s ed t h e fo ll o wi n g am o u n t s: car an dtru ck
ex p en s es --$ 1 4 ,0 7 9 ; o t h er--$ 12 ,0 0 0; l eg al an dp ro fes s i o n al --$ 3 ,5 00 ; o ffi ce
ex p en s es --$ 7 ,0 4 3 ; s up pl i es --$ 7 0 5 ; trav el --$ 6 , 5 50 ; m eal s an d en t ert ai n m en t -- $ 3 ,7 7 0 ; an do t h er ex p en s es --$ 2 ,7 4 7 (a co m p o s i t e o f th ree s m al ler am o u n t s ). In t h e n o ti ce o f d efi ci en cy

res po n d en t d i s al l o wedal l o f p et i t i o n er’ s cl ai m ed ex p en s e d educt i o n s . At tri al res p o n d en tco n ced edth atp et i t i o n er was en t i t l edt o d edu ctthe $ 3 ,5 0 0 o f l eg al an d p ro fes s i o n al ex p en s es . Pet i t i o ner, as an em

p lo y ee o f PIM CO, wro t e d at ab as e s o ftware co d e an d rel at ed s oft ware. Pet it i o n er’ s Sch edu l e C act i v i t y was p u rp o rt ed l y t o wri t e
s o ft ware fo r a s t o ckp ri ci n g fo recas t s y s t em fo r s t o ck trad i n g . Fo r p u rp o s es o f res p o n d en t ’ s au d ito f p et i ti o n er’ s 2 0 1 5 return , p et i t i o n er
an d h i s ret urn p rep arer m ad e up s u m m ari es an d s ch edu l es thato u t l i n edth e v ari o u s
ex p en s es rep o rt edo n Sch edu l e C. Th o s e s u m m ari es an ds ch edul es al on g wi t h b an k s tat em en t s were s ub m i t t edattri al wi th o u tan y o t h er o ri g i n al reco rd s o r an y b ackup d o cu m en t at i o n . Th e s u m m ari es an ds ch edu l es were i n accu rat e as t o d at e, p l ace, an do t h er d et ai l s .- 4
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A s t at em en tat tach ed t o p et i t io n er’ s Sch edu l e C i n d icat es th ath is p o s i t i o n wi t h PIM CO was as an i n d ep en d en tco n t ract o r an dth ath e was “ al l o wed t o t ak e o n
o t h er cl i en t s an dthe o nl y th i n g th ati s req u i redfro m h im i s co n fi den t i al i t y ”. At t ri al p et i t i o n er s tat edth atth e ab o v e s t at em en twas n o tco rrect o r t ru e. Th e
s t at em en tal s o s t at edthatPIM CO m ad e th e $ 1 0 ,0 0 0 p aym en tt o p et i t i o n er an dthat i t w as s up p o s edt o b e s h own o n a Fo rm 1 0 9 9
. Attri al p et i t i o n er s t at edth atn o p aym en t s, o t h er t han h i s s al ary as an em pl o y ee o f PIM CO, were p ai dt o h im b y PIM CO. In ad d i t i o n , a s t at em en to n the 2 0 1 5 retu rn s t at es th ata Fo rm 1 0 9 9 was
n o trecei v ed an ds o i twas n o tat t ach edt o t h e ret u rn . Pet i t i o ner s ig n edan em

p l o ym en tag reem en twi t h PIM CO t h atp ro hi b i t edth e t y p e o f b u s i n es s act i v it y

d es cri b ed o n h is retu rn . Fu rth er, p et i t i o n er s i g n edan ag reem en tth ath e wo u l dtran s fer t o PIM CO an y i n v en ti o n s o r i d eas t h ath e creat ed
o u t s i d e o f h i s em

p l o ym en tduri n g h i s em

p lo ym en t , i n cl u di n g du ri n g 2 0 1 5
. Di s cu ss i o n Th e s o l e i s su e we co ns i der i s wh eth er p et i ti o ner h as s ub s t an t i at edv ari o u s
ex p en s es rep o rt edo n h i s 2 0 1 5 Sch edu l e C at tach edt o h i s i nco m e t ax retu rn . Th e Co m m i s s i o n er’ s d et erm in at i o n i s g en eral l y p res u m ed co rrect , an dth e t ax p ay er h as t h e b u rd en t o s h o wth ata d et erm i n at i o n i s i n erro r. Ru l e 1 4 2 (a); s ee W el ch v . Hel v eri n g , 2 9 0 U.S. 1 1 1 , 1 15 (1 9 33 ). Pet i t i o n er’ s b u rd en i n thi s cas e i s t o s h o w- 5
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en t i t l em en tt o th e d edu ct io ns h e cl ai m edo n t h e Sch edu l e C. Ru l e 1 4 2 (a); s ee INDOPCO, In c. v . Co m

m i s s i o ner, 5 0 3 U.S. 7 9 , 8 4 (1 99 2 ); New Co l o n i al Ice Co
. v . Hel v eri n g , 2 9 2 U.S. 4 3 5 , 4 4 0 (1 9 3 4 ). Pet i t i o n er’ s b u rd eni ncl u d es
s ub s t an t i at i n g th e am o un t s an dp u rp o s e o f t h e ex p en d i tu res cl ai m edas d edu ct i o n s . See Hrad es ky

v . Co m m is s i o n er, 6 5 T.C. 8 7 , 9 0 (1 9 7 5 ), aff’ dp er cu ri am , 5 4 0 F.2 d 8 2 1 (5 th Ci r. 1 9 76 ). Bu s i n es s ex p en s es , t o b e d edu ct ib l e, m us tb e o rd i naryan dn eces s ary an d p ai do r i n cu rred i n carry in g o n a t rad e o r b u s i n es s. See s ec. 1 6 2 . A t ax pay er i s req u i redt o k eep reco rd s t o s ub s t an ti at e i t em s rep o rt edo r cl ai m edo n a ret urn . Ham an v . Co m

m i s s i o n er, 5 0 0 F.2 d4 0 1 (9 t h Ci r. 1 9 7 4 ), aff’ g T.C. M em o . 1 9 7 2
- 1 1 8 . M o re p art i cu l arl y

i n thi s cas e, p et i t i o n er’ s d edu ct i o n s fo r m o s to f t h e rep o rt edex p en s es are s ub jectt o th e m o re s tri ctp ro o f req u iredb y s ect i on 2 7 4 (d ). Th ats ect i o n p ro v i d es th atd edu ct i o n s fo r cert ai n ex p en s es o t h erwi s e al l o wab l e
u n d er s ect i o n 1 6 2 o r 2 1 2 , i n cl u d i n g trav el , m eal s an den t ert ai n m en t , au to m o b i l e,
an d co m p u t er o r p eri p heral equi p m en t , s h al l n otb e al l o wed“ un l es s t h e t ax p ay er
s ub s t an t i at es [t h em ] b y

ad eq u at e reco rd s o r b y s uffi ci en t ev i den ce co rro b orat i n g t h e t ax p ay er’ s o wn s t at em en t ”. W i t h res p ect t o trav el , m eal s an d en t ert ai n m en t , an dau t o m o b i les , a t ax p ay er
m u stp ro vi d e ad eq u at e reco rd s t o s h ow: (1 ) t h e am o u n t o f th e ex p en se; (2 ) t h e- 6
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t i m e an dp l ace t h e ex p en s e was i n cu rred ; (3 ) t h e b u s i n es s p u rp o s e o f t he ex p en se;
an d (4 ) th e b u s i n es s rel at i o n sh i p o f t h e p ers o n b ei n g en t ert ai n ed . See s ec. 1 .2 7 4- 5 T(b )(2 ) an d (3 ), Tem

po rary In co m e Tax Reg s ., 5 0 Fed . Reg
. 4 6 0 1 5 (No v . 6 , 1 9 8 5 ). Th i s cas e p res en t s an u n u s u al s i tu at i o n. Pet it io n er rep o rt edthath e was an i n d ep en den tco n t ract o r wi t h PIM CO an d t hath e was en t i t l edt o t ak e o n o u t s i d e cl i en ts . Inl i n e wi t h th ats t at em en t , p et i t i o n er rep o rt ed $ 1 0 ,0 0 0 o f i n co m e fro m h i s p u rp ort edact i vi t y

as an i n d ep en d en tco n t ract o r al leg ed l y p erfo rm in g th e s am e t y p e o f wo rkp erfo rm ed fo r PIM CO. He al s o cl ai m edp u rp o rt edb u s i n es s ex p en s e d educt i o n s o f $ 5 0 ,3 9 4 , wh i ch wo u l d h av e res u l t edi n a $ 4 0 ,3 9 4 l o s s fro m th e Sch edu l e C act i v i t y . Attri al , h owev er, p et i t i o n er d i s av o wedh is s t at em en tth ath e was an i n d ep en den tco n t ract o r wi t h PIM CO. In st eadh e t es t i fi edth ath e was an
em pl o y ee. In ad d i t io n , ev i d en ce i n t h e reco rd s ho ws thath e h adag reed wi t h PIM CO t h ath e wo u l d n o tp erfo rm th e s am e ty

p e o f wo rk wi th o u ts id e cl ien t s o r
u s e h is ex p eri en ce i n s uch p u rs u i t s . Th e p res en t at io n an dex p lan at i o n at t ach edt o t h e Sch edu l e C was acco rd in g l y a fab ri cat i o n i n t en d edt o es t ab l i s h th e ap p earan ce
o f a Sch edu l e C b u s i n es s act i v it y i n o rd er t o rep o rtl o s ses th atco u l d b e cl ai m edt o b e d edu ct i b l e fro m

o rd i n ary i n co m e.- 7
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Fu rt her d il u t i n g p et i t i on er’ s p o s i t io n i s th ath e d o es n oth av e an y o ri g i n al
reco rd s o f t h e al l eg ed act i v i t y o t h er t h an h i s b an ks t at em en t s fro m wh i ch h i s retu rn p rep arer d ev el o peds u m

m ari es i n an at t em

p tt o s up p o rtth e m o re t h an $ 5 0 ,0 0 0 i n cl ai m edd edu ct i on s . Pet i t i o n er’ s t es t i m o n y was v ag ue, an dh e d idn o t g o i n t o an y d et ai ls o f h i s al l eg ed b u s i n es s act i v i t y . Oncro s s -ex am i n at i o n i twas s h o wn th at t h e s u m m ari es h ad n u m ero u s i n accu raci es an d co nt rad i ct i o n s. Un der t he ci rcu m s t an ces , we fi ndth at p et i t i o n er’ s t es t im on y an do t h er ev i d en ce l ack cred i b i l i t y . Of t h e $ 5 0 , 3 9 4 i n cl ai m edSch edu l e C ex p en se d educt i on s , $ 1 4 , 0 7 9 was fo r
car ex p en s es . Pet i t i o n er cl ai m edth ath e t rav el edreg u l arl y fo r l u n ch eo n m eet i n g s wi t h cl i en t s . Oncro s s -ex am i n at i o n , res p o nd en t ’ s co u n s el b ro u g h t o u tth atm o s to f t h e t ri p s rep o rt edi n th e s u m m ari es (n o o ri g i n al o r co nt em p o ran eo u s t rav el l o g s were i n ev i d en ce) were t o th e l o cat i o n o f PIM CO wh ere p et i t i o n er was em p l o y ed
. Acco rd in g ly , h i s trav el ex p en s es co n s i s t edo f n o n d educt i b l e co m m u t i ng ex p en s es . See Fau s ner v . Co m

m i s s i on er, 4 1 3 U.S. 8 3 8 (1 9 7 3 ). In v i ew o f t h e fo reg o i n g , wi t h th e ex cep t io n o f t h e $ 3 ,5 0 0 res p o nd en t
co n ced ed , we h o l d t h atp et i t i o ner i s n o ten t i t l edt o th e cl ai m edSch edu l e C d educt i o n s .- 8
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Becau s e o f co n ces s i o n s , Deci s i o n wi ll b e en t eredu n d er Ru l e 1 5 5
.